Issues 2002

Wasting no time to begin the New Year, stock prices burst out of the starting
blocks for what will certainly be another wild ride during 2002. For the week,
the Dow and S&P500 added about 1%. On the back of a flurry of stronger
data, economically sensitive issues shined. For the week, the Transports jumped
7% (now having fully recovered to August levels) and the Morgan Stanley Cyclical
index added 3%. More defensive issues struggled, with the Morgan Stanley Consumer
index declining 1% and the Utilities basically ending unchanged. The Biotechs
generally dropped 5%. The broader market rally continues, with the small cap
Russell 2000 and S&P400 Mid-Cap indices increasing 1%. The technology sector
caught fire as the week progressed, with the NASDAQ100 gaining 3%, the Morgan
Stanley High Tech index 7%, and the Semiconductors 9%. The Street.com Internet
index gained 6% and the NASDAQ Telecommunications index rose 3%. In quite frenetic
buying, the AMEX Securities broker/dealer index surged 7% to levels not reached
since last May. The S&P Bank index added 1%. With bullion up $2.40, the
HUI Gold index added about 2%. The CRB index added 1%, for its highest close
since September.

And while Credit market participants must be watching the stock market and
economic data with increasing trepidation, the market held its own. For the
week, 2-year yields were basically unchanged at 3.15%, 5-year yields added
one basis point to 4.42%, and 10-year yields gained two basis points to 5.13%.
The long-bond saw its yield increase one basis point to 5.54%. Spreads narrowed
across the board, with mortgage-back yields actually declining 6 basis points
this week. Implied yields on agency futures dropped 2 basis points. The spread
to Treasuries for Fannie Mae's 5 3/8 2011 note narrowed 3 to 72. The benchmark
10-year dollar swap spread narrowed 6 to 72. The dollar index declined about
1%.

In a potentially significant global development, the latest mortgage and consumer
data indicate that UK mortgage and consumer lending are expanding at double-digit
rates. Bank of England governor Sir Edward George told a BBC television audience
today that credit-induced overspending might force the Bank of England to raise
rates this year. UK holiday spending rose at the highest rate since 1987, consumer
confidence is recovering rapidly, and home prices continue to inflate at troubling
rates.

"Numerous financial institutions have taken advantage of the attractive
opportunities in the leverage market over the past six months. For those institutions
that are still looking to execute their first transaction or for those institutions
that want to add another transaction to their leveraged portfolio, the spreads
on many strategies recommended remain historically wide. While rates on
many FHLB (Federal Home Loan Bank) advances have risen in the last few months
in sympathy with yield levels along the treasury yield curve, yields on the
many fixed-income securities have also increased, allowing spreads on many
strategies to remain attractive." Fixed Income Research, January 2, 2002

According to Convert.com, a record 210 convertible bond deals worth $104.9
billion were issued during 2001, up 70% from year-2000's $61.6 billion (146
deals). JPMorgan data has total U.S. public asset-backed security (ABS) issuance
at a record $269 billion during 2001, up 17.5% from 2000, while forecasting
$300 billion issuance for 2002. European ABS issuance jumped 60% to almost
$125 billion during 2001. An explosion of fourth-quarter activity saw European
CDO (collateralized debt obligation) issuance doubled to $151 billion, led
by the UK. According to Bloomberg, investment banks issued $516 billion in
CMOs (collateralized mortgage obligations) in the U.S. during 2001. CMO issuance
surged to $211.6 billion during the fourth-quarter, significantly surpassing
the $187 billion issued during the entire year-2000. From Bloomberg: "Fannie
Mae, Freddie Mac, Ginnie Mae and mortgage banks sold a record $835 billion
in mortgage passthroughs last year Last year's boom in lending, estimated
to have reached a record $2 trillion, came as the Federal Reserve slashed its
benchmark interest rate 11 times to the lowest level in 40 years, prompting
consumers to refinance their mortgages at lower rates As the Fed cut
short-term rates, it became more profitable to take long-term assets, such
as 30-year mortgage bonds, and carve them into short-term securities, such
as two-year CMOs." Goldman Sachs was the number one Wall Street mortgage
bond underwriter at $72 billion. Elsewhere, Bloomberg data indicates that $944
billion of mortgage-back securities were issued in 2001, including $727 billion
of 30-year mortgages. The data also has 66% of this paper issued with mortgages
yielding 6.5% or less, paper that is today "under water." This week
Freddie Mac reported 30-year mortgage rates at 7.14%.

Wednesday the Institute for Supply Management (formally the National Association
of Purchasing Management/NAPM) reported that its December index of manufacturing
activity increased almost 4 points to 48.2. This is the strongest reading in
14 months and the largest two-month increase since January-February 1983. The
New Orders component increased 6.1 points (16.6 points in two months!) to the
highest level since April 2000. The production index also rose above 50 (indicative
of expanding activity), almost recovering back to September levels. And while
the Prices component remains tame at 34.7, it is worth noting that December
1998's 32.6 reading increased to 69.4 over the following 12-months before peaking
at 78.5 during March 2000.

Today's payroll data had December job losses at 133,000, a sharp reduction
from the average of 328,000 over the previous three months. The average hourly
workweek increased from 34.1 to 34.2 hours and manufacturing overtime actually
rose from 3.7 hours to 3.9. Perhaps the most notable aspect of this report
is that, for the second consecutive month, average hourly earnings were reported
at a stronger-than-expected gain of 0.5%, indicative of continued wage pressures
in the face of a weak jobs market. Private sector wages enjoyed back-to-back
increases of 0.8%, with wages up 5% year over year. This is a trend to monitor
closely during 2002. During December the manufacturing sector lost another
133,000 jobs (vs. November's 165,000 decline), while the government added 63,000
(vs. November's 11,000 decline). The service sector was back in hiring mode,
adding 9,000 jobs after dropping 202,000 in November. Health services added
31,000 jobs, consistent with its recent performance. Today's Institute for
Supply Management non-manufacturing index (formerly NAPM) jumped to 54.2, the
highest reading this year and the second consecutive month of expanding activity
(index above 50). The index has now surged 13.6 points off of October's low.
The New Orders component jumped to 52.6 (up 12.2 points in two months), indicative
of growth for the first time since June.

Easy and ultra-cheap Credit pushed December new vehicle sales to a stronger
than expected (again) annualized rate of 17.2 million units, up 7.2% year over
year. This propelled year-2001 sales to the second-strongest year ever, only
1.3% below last year's record. For comparison, vehicles sales never surpassed
a 13.5 million rate during any month of 1991/92, with monthly sales averaging
about 12.6 million units. GM sales were up 7.2% during December, with 2001
sales down only 1%. Ford's December sales were flat and down 6% for the year.
DaimlerChrysler's sales were up 6.2% and down almost 10% for 2001. Honda enjoyed
it best year ever in the U.S., with its Accord surpassing the Toyota Camry
as the best-selling model in America. The last U.S. nameplate to hold that
distinction was the Ford Taurus back in 1996. Honda's luxury Acura division
saw 2001 sales up almost 20%, "shattering" the previous record set
in 1991. It was Toyota's best year in the U.S., with sales increasing 7.5%.
Toyota truck sales surged 29%. Lexus enjoyed its best December to finish a
record year, as 2001 sales gained 8.7%. Record years were enjoyed by Mercedes
(+ 0.5%), BMW (+ 12.5%), Volvo (+ 2.1%), and Audi (+ 3.6%). Porsche had its
best year in the U.S. since 1987, while Jaguar's 31% jump in December sales
led to an almost 2% rise for all of 2001. Volkswagen's December sales were
up 9.3% y-o-y, with 2001 unchanged from strong year-2000 sales. Year-2001 sales
increased 5.5% for Mazda, 2.5% for Mitsubishi, and 8% for Subaru (beats 1986
record), while sales declined 6.5% at Nissan. The Korean manufactures had a
huge record year, with sales up 41.7% at Hyundai and 39.3% at Kia. A Toyota
executive summed up the year: "The auto industry threw a great New Year's
party and it was a fitting end to a challenging year. Strong industry sales
in the final quarter buoyed a lagging economy." This key industry - for
the economy and Credit system - is now firmly poised for disappointment.

November construction data also makes for interesting reading (also buoyed
by easy Credit), as we sift through detail seeking clues to "sectoral" economic
trends. Total construction spending was up a stronger than expected 0.8%, although
there were meaningful downward revisions to October data. Nonetheless, 2001
will be a record year for total construction expenditures, with November spending
of $865.1 billion up 4.6% year over year. This is, for comparison, a 31% increase
from "pre-Bubble" construction spending levels from November 1997.
Total "private" spending ($650 billion annualized) is about flat
year over year, with gains in residential construction offset by a sharp slowdown
in commercial building activity. November new housing construction ($277.5
billion ann.) was up almost 7% from last year, although it is worth noting
the marked slowdown (down 6% from August's peak) in expenditures on home improvement
($112.1 billion ann.). Total residential spending in November ($389.6 billion
ann.) registered its sharpest decline in some time (down 2.2% for the month),
although remains up 31% from November 1997. Non-residential spending ($197.7
billion annualized) was down 9% y-o-y, with hotels/motels ($13.9 billion ann.)
down 12%, Industrial buildings ($25.6 billion ann.) down 23%, and office buildings
($50.1 billion ann.) down 17%. From November '97 levels, hotels/motels construction
spending is up 7%, industrial buildings up down 31%, and office buildings up
33%. The two key "stories" remain the resiliency of housing construction
and the less appreciated public sector construction boom. Total public construction
spending ($215.1 billion annualized) jumped 12% over the past two months, with
November spending up 22% year over year. Education-related spending ($59.2
billion ann.) is up 32% year over year, "roads" ($58.9 billion ann.)
20%, and "Other" ($36.8 billion ann.) 27%. Total public spending
was up 47% from November 1997 and is about double levels from the recessionary
period 1991/92.

In another case of "more data than you likely want to deal with," I
will use the first week of the New Year to dive into the Treasury Department's
latest (October) "Treasury International Capital (TIC) data"/"U.S.
Transactions With Foreigners in Long-Term Securities." Not only does it
make for interesting perusing, these flows could prove a key variable for U.S.
financial markets and the dollar during 2002.

For the month of October, a record net $66 billion flowed from foreign sources
into U.S. long-term securities, as purchases of $1.134 trillion offset sales
of $1.068 trillion. These flows were instrumental in supporting both the dollar
and U.S. markets during a critical month. And while many will persist with
the propaganda that the world remains infatuated with the U.S. economy and
its securities, it is worth noting that the U.K. and Japan (leading global
financial centers) accounted for $56.4 billion of the net flows, or 85%. Net
flows from the U.K. jumped to $21.9 billion (78% of total net European flows)
from $6.9 billion the previous October. Net inflows from Japan surged to $34.5
billion (94% of total net Asian flows), versus year ago October's $6.7 billion.

October net U.S. stock purchases of $7.2 billion (or 11% of total net flows)
compare to last October's $16.3 billion (37% of total net flows). Year-to-date,
$90 billion of net flows into U.S. stock are 22% of total net flows, compared
to about $155 billion, or 42%, for the same period last year. If, as claimed,
it is foreign investors confidently choosing to participate in the "productive" technology-driven
U.S. economy, they are curiously doing it increasingly through the agency and
corporate bond market. More likely, a large portion of these flows emanates
from institutions playing interest rates (spreads?) and the dollar, encompassing
potentially problematic "hot money" bets as opposed to stable long-term
investment.

Foreign sources made record net agency securities purchases of $27 billion
(easily beating March's previous record mark of $19.5 billion) during October,
up more than 50% from October 2000's $18.2 billion, and almost three times
10/99's $9.3 billion. Agency purchases accounted for 41% of total net flows
during October, compared to 35% for the entire year-2000, 26% for 1999, 21%
1998, and 17% for 1997. Curiously, the Cayman Islands accounted for almost
$100 billion (45%) of gross agency transactions, although net flows were inconsequential.
That's one busy little group of islands. The U.K. accounted for net agency
securities purchases of $9 billion for the month (up 103% y-o-y), while net
agency purchases out of Japan of $13.6 billion compared to $2.8 billion during
October 2000. The Japanese also bought a net $16.6 billion of Treasury paper
during the month.

Year-to-date, net flows totaled a staggering $410 billion, up 11% y-o-y, and
roughly in line with the expanding current account deficit. Net agency and
U.S. corporate debt purchases of $341 billion were up 26% y-o-y, accounting
for 83% of total net foreign inflows. Comparable year-2000 data has combined
net agency and corporate bond purchases of $271 billion accounting for 73%
of total net inflows. Comparable (y-t-d through October) agency and corporate
purchases were $214 billion during 1999 and $140 billion during 1998, in what
must be recognized as a troubling accumulation of foreign liabilities. The
composition of foreign security purchases has changed profoundly since 1997.
For that year, $184 billion of net Treasury purchases comprised 62% of total
net flows, with corporate bonds at 28%, stocks at 23% and agencies at 17%.

Jan. 2, PRNewswire - "Investors suffered in 2001 not only from falling
stock prices, but also from shrinking dividends, according to Standard & Poor's With
the recession sending profits into a tailspin, corporations cut back significantly
on their dividend payments. Modest improvement, at best, is projected for 2002.
Last year saw a 3.3% drop in dividends on the S&P 500 index, the largest
decline for any year since the 4.1% slide in 1951. The drop in 2001, along
with the 2.5% dip in 2000, represented the first back-to-back dividend declines
since 1970-71. Dividends haven't fallen three years in a row since 1931-33."

Cogent comments from Merrill Lynch's Richard Bernstein: "Just to reiterate
a comment we made just before Christmas, the earnings variability of the S&P
500 is the highest since 1947. In other words, the predictability of earnings
is the worst in 55 years! The current situation, i.e., highest P/E in
history combined with the highest earnings variability in 55 years seems to
reflect simple speculation." And let's not forget the influence of excessive
financial sector liquidity.

I have been reading through a number of articles and reports discussing prospects
for the New Year. I thought this week's NYT Charles Clough, Abby Joseph Cohen,
and Byron Wien "roundtable" - "Wall Street's Prescriptions in
a Convalescing Economy" - was interesting as much for what was said as
for key issues that were not addressed.

To begin with, Goldman's Abby Joseph Cohen made one of the silliest statements
I have read in a while: "I think the Fed is not getting the respect it
deserves I think the Fed deserves a great deal of credit for the other
function, which is supervision and regulation. The Fed went into the nation's
commercial banks in '97 and again in 1998 during the Asian crisis and the currency
crises saying, 'You guys better make sure of your lending standards.' And the
banks did a fabulous job. We are now two years into a very broad-based economic
deceleration, and I'm not aware of any bank failure."

Well, let's keep in mind that the third quarter's 1.3% annualized contraction
(GDP was up 2.9% year over year) was the first quarter of negative GDP since
1993's third quarter. Since that minor contraction, nominal GDP surged an historic
54% to $10.2 trillion. Additionally, November's personal income was up 2.9%
y-o-y, while November personal spending was 3.9% ahead of year ago levels.
November retail sales were about 3.5% above November 2000. Total 2001 new vehicle
sales were near record levels and the economy enjoyed record construction spending.
When the final tallies are made there will be records aplenty throughout the
housing sector. Most real estate markets remain near peak, inflated prices.
Furthermore, during the first three quarters of year-2000 total credit market
debt expanded at a 6.5% annualized rate, with the non-financial corporate sector
increasing borrowing at a 5.3% rate. Financial sector debt continued its blistering
double-digit growth rates, expanding at a rate of 10.5% for the first three
quarters. The household sector increased borrowing at a 7.8% during the first
quarter, 9.3% during the second, and 8.3% during the third quarter. Leading
the unrelenting consumer borrowing binge, total mortgage debt grew at an unprecedented
annualized rate of $717 billion (10.3%). The soundness of the banking system
will be tested when Credit growth slows, particularly throughout the mammoth
real estate sector. It is not only obviously too early to celebrate the banking
system's success in weathering the developing storm, history will certainly
not look kindly at the Fed for its negligence in supervising and regulating
the U.S. financial system. Apt analysis would underscore the ominous portends
that come with the flurry of major corporate bankruptcies and financial institution
problems in the face of relatively buoyant income and spending growth, and
persistent consumer over borrowing.

Ms. Cohen also made several other questionable statements: "The recession
is probably much closer to its end than its beginning"; "Let's be
honest about where the problem in the economy is. It's inadequate demand, it's
consumers feeling funky;" and "Now we're into what is the most painful
part of an adjustment process in the economy, and that's in the labor markets." Well,
we would not rule out a quarter or two (or perhaps even three) of positive
GDP growth, but let's not delude ourselves. The issue is not if we will quickly
return to a spurt of Credit-induced positive GDP, but rather that this is only
delaying an unavoidable protracted recessionary period. Unfortunately, the
extent of the downswing will be proportional to boom-time excesses, and the
profligate consumer sector will be forced to retrench. As such, there's one
heck of an increasingly problematic economic and financial adjustment being
held temporarily at bay by the latest bout of rampant Credit and speculative
excess. We'll start to search for light at the end of the adjustment tunnel
when we believe the consumer sector has worked off some of its unprecedented
debt load, we see significant shakeout from years of mortgage finance excess,
we witness a reversal of severe structural economic imbalances such as the
enormous current account deficits, and there is meaningful unwinding of unprecedented
U.S. financial sector leveraging and speculation. In particular, there will
be no escaping the difficulties that will surface when the economy and financial
system commence the weaning process away from the gross liquidity excesses
Bubbling for years out of the mortgage finance superstructure. We expect this
process to be forthcoming, hence we will place "mortgage finance" as "Issue
#1" in our list of "Issues 2002."

Issue #1) Mortgage Finance - This, the largest, most conspicuous and dangerous
of U.S. Bubbles, is the key open question for 2002. There is a high probability
that 2001's record originations and total mortgage debt growth could prove
a high-water mark for years to come. Refi booms - in this strange system
of contemporary finance - developed into the Fed's and U.S. financial sector's
powerful "Trump Card." This card was again played aggressively
(recklessly) during 2001, and unless something dramatic transpires it would
appear this extraordinary period of refinancings has nearly run its course.
And with this refi boom having assumed such an instrumental role in sustaining
both consumer spending and financial sector liquidity, we would expect to
see various negative consequences unfold as the year progresses. It is also
important to keep in mind that while short-term interest rates are 425 basis
points lower today than one year ago, mortgage rates are relatively unchanged
with many mortgage investors/speculators caught by the "irrational exuberance" bug
and now uncomfortably underwater. This is not a bullish development. In fact,
the mortgage finance sector has all the ingredients for a troubled role as
spoiler for 2002.

A "roundtable" consensus saw little risk of either higher interest
rates (Clough: "We should get ready for astonishingly low interest rates
for a fairly extended period") or a declining dollar (Cohen: "The
U.S. is looking relatively good Let's keep in mind that the productivity
of the U.S. worker is probably 30 percent above that of other industrial nations").
Apparently, with inflation in check, other issues such vulnerable foreign financial
flows, extreme financial sector leverage, unprecedented derivative positions,
and previous gross speculative excess are all non-factors. We are not so convinced,
viewing today's palpable complacency on the dollar, inflation, and interest
rates as unwarranted and potentially problematic.

Issue #2) The dollar and U.S. interest rates - There is a prevailing bullish
consensus that the dollar will maintain its strong global position, and that
the Fed has interest rates under control irregardless of dollar fortunes.
Yet it was not all too many years ago that serious analysis held that a weak
dollar had clear potential for fostering higher domestic interest rates and
inflationary pressures. Keep in mind our perspective that the U.S. system
played its liquidity "Trump Card" during 2001, with Fed moves proving
a lightening rod for another shot of what will eventually prove destabilizing
foreign speculative flows. Arguably, the Fed's dramatic rate cuts were the
most telegraphed central bank policy ever, signaled directly to the largest
and most enterprising global leveraged speculating community in history.
The resulting virtually insatiable demand for U.S. Credit market instruments
was, however, easily sated with a record flood of convertible bonds, agency
debt, mortgage-backs, asset-backs, corporate bonds, CMOs, and such. Now what?
We see clearly the dynamics for previous demand, but the future remains cloudy.

It now becomes difficult for us to shake our hunch that the U.S. financial
sector sits tenuously on history's most "crowded trade" in leveraged
holdings (much financed by overseas borrowings) in Credit instruments. It is
also our sense that the marketplace sees its aggressive position as at least
somewhat underwritten by Washington. We will be watching foreign flows closely
going forward, and would not be surprised if October's record net foreign purchases
of U.S. securities proves one more major Credit Bubble "high-water mark." Aggressive
acquisitions did come in the midst of a flurry of Fed post-Sept. 11th cuts
and liquidity operations, marking what could prove a significant top in the
U.S. Credit market. If 2001 proves the speculative "blow-off" in
foreign-financed holdings of U.S. Credit market instruments this will undoubtedly
hold significant ramifications for U.S. financial sector liquidity and the
dollar, as well as U.S. financial market and economic performance for 2002
and beyond. Will this finally be the year markets begin to fret over the U.S.'s
intractable current account problem?

Issue #3) The U.S. "repo" market - With outstanding repurchase
agreements surging to about $2 trillion, we will include the soundness of
this key market as a critical issue for 2002. This potential accident has
been in the making for some time. A continuing stock market rally and rapidly
recovering economy would not be favorable developments for this vulnerable
financial Bubble. The "repo" market thrives on economic weakness
and rate cuts.

Issue #4) Convertible bond market - recognizing the past few year's issuance
boom and the bevy of players now speculating with sophisticated leveraged
strategies, we see this as a market vulnerable at the margin to waning U.S.
financial system liquidity and/or unfolding dislocation in leveraged speculation
("canary in the mine shaft?"). And since many of these strategies
incorporate short positions in the underlying equities, as well as various
derivative structures, stock market volatility will be a problematic characteristic
of this sector.

Mr. Clough stated his belief that "the accounting profession is about
to undergo massive restructuring of principles and organization. The Enron
event is really just the icing on the cake. Accounting principles have been
violated five ways to Sunday for years " We are in strong agreement,
and we will interpret the bevy of Washington hearings delving into the Enron
fiasco as likely also marking an important inflection point for "structured
finance" generally. If the proliferation of off-balance sheet vehicles
and shady agreements and financings become an issue during 2002, the ramifications
could be enormous. Along with the CPAs, we would expect the rating agencies,
Credit insurers, Wall Street firms, major derivative players, and the investment
community generally to incorporate a more cautious approach to what clearly
regressed into an ugly episode of wildcat finance run amuck. We will be watching
the unfolding J.P. Morgan/Enron saga intently.

As potentially problematic risk aversion took hold during 2001, particularly
in the sub-investment grade corporate market, this opened the door wide open
for asset-backed commercial paper and other "structured" instruments
to become an ever more critical cog in the wheel of the U.S. Credit system.
Last year "structured finance" kept the Credit Bubble (and U.S. economy)
afloat. We now see the distinct possibility that we have witnessed the "blow-off" culmination
of excess throughout this critical arena, with, again, major ramifications
for the U.S. financial sector and economy. As we have said before, "As
goes U.S. 'structured finance,' so goes the dollar" and financial system
liquidity. We expect "liquidity" to be a critical issue throughout
2002.

Issue #5) Will the marketplace, and particularly the huge money market fund
complex, look more skeptically at asset-backed commercial paper and other "structured" vehicles
and instruments. And in a related issue, will 2002 see any waning of confidence
in the vulnerable Credit insurers? Will the default swaps market be further
tested?

Issue #6) GSE balance sheet growth. The U.S. Credit system is addicted to
the liquidity/monetary injections emanating from GSE expansion. If, for any
reason, continued extreme asset growth is not forthcoming, there will be
significant negative consequences. We read repeatedly of expectations that
spread products hold the best opportunities for 2002 (isn't "everyone" already
in these trades?). All the same, we expect spreads (and liquidity problems)
to again be inversely correlated to GSE asset growth. For 2002, with the
leveraged speculating community all dressed up to party, there is a lot riding
on the continued generosity of their GSE hosts. We would expect the banking
system to lend cautiously, while the hedge funds and Wall Street firms have
already aggressively placed their bets. Yet the financial sector will need
to once more muster heady expansion to keep the Credit Bubble levitated.
Will the GSEs, mortgage finance, and the asset-backed market again carry
the load for 2002?

In a change of pace, I would like to keep this piece as concise as possible.
Many, like Cohen, Clough and Wien, are understandably focused on the prospects
for the U.S. economy and stock market, maintaining generally sanguine views.
The resiliency of the economy and stock market has, after all, been repeatedly
demonstrated with hopeful signs abounding. All the same, it is more important
than ever to recognize that as the year unfolds it will be the U.S. Credit
system that determines the prospects for the U.S. economy and equity market.
Can the Great Credit Bubble survive yet another year? With the view that the
sustainability of this historic Bubble is in doubt, I believe very strongly
that this will be a critical year for Credit Bubble analysis. As we discussed
and followed closely throughout 2001, the powerful GSE and Fed contingent again
instigated "Crisis Management Reliquefication Mode." We have necessarily
been in an analytical waiting game. And as Credit data makes abundantly clear, "reliquefication" was
one more time a spectacularly precarious success. A desperate Fed this time
went so far as to choose the rapid-fire approach for expending its bullets.
For 2002, the system will now be forced to fight what will prove quite hostile
consequences, with a paucity of ammo. As always, and certainly as expected,
there will be powerful forces operating diligently to perpetuate both Credit
excess and inflated asset markets, while hoping to breathe continued life into
the hopelessly maladjusted U.S. economy.

Well, all eyes on mortgage finance! Additionally, the extent to which foreign
central banks and governments will be willing to aid in sustaining U.S. financial
excess (as September's tragic events become more distant) could prove a critical
variable for 2002. Another unsettled and wildly volatile year in U.S. and global
financial markets is a virtual certainty. And, importantly, the volatility
wrecking ball will continue to take its toll.